Economic Logic, Too

About Me

I discuss recent research in Economics and various events from an economic perspective, as the name of the blog indicates. I plan on adding posts approximately every workday, with some exceptions, for example when I travel.

Tuesday, November 30, 2010

I reported now long ago on the consequences of slavery in Africa, where it is shown that countries where more slaves were taken still have lower levels of development. It is quite amazing that this can have an impact on average income for so long. But what about the receiving end of the slave trade?

Graziella Bertocchi and Arcangelo Dimico look at county data for the US and find that current average incomes are not related to the inflow of slaves. However, income inequality is. Why would that be? It could be because slave could not own land, and this still has an impact today. Or it could be because of discrimination. Or it could be because of persistent differences in human capital.

Now using a panel data set, Bertocchi and Dimico find the last one is the most likely one. The education gap between blacks and whites has never recuperated, and segregation was certainly part of it. But this strongly persistent effect means that affirmative action still has a reason to be.

Monday, November 29, 2010

Much of macroeconomics, and in particular New Keynesian Macroeconomics keeps relying on price rigidities to get anything monetary to have any relevance. That is not necessarily bad, but it becomes problematic when this is implemented with Calvo pricing which essentially states that no matter what the state of the economy or how long ago a firm has last changed its prices, firm change their prices with the same probability. This is an utterly ridiculous assumption against which I have already railed often, but people keep using it because it is analytically convenient. I am still looking for a good model of price rigidity, beyond the ones already discussed here. (Previous posts: I, II, III, IV)

The latest candidate is by Paul Middleditch. When I saw the title, A New Keynesian Model with Heterogeneous Price Setting, I was very hopeful to finally see a NK model where firms are heterogeneous and decide when and how much to change prices, leading to fluctuating proportions of price changing firms. My hopes were quickly dashed. The heterogeneity here is simply that there are three types of firms, each blindly obeying to a different Calvo probability. Nothing to see here.

Friday, November 26, 2010

Why an economy's financial development matter for its fertility? For one, if there is little in terms of savings technology, then households need to find other ways in which they can save for old age, and children have traditionally been a good way to do this. But as long as property rights are reasonably well established, this should be that important, as there are many ways beyond financial assets to accumulate wealth, such as land, real estate, jewelry and cattle. Where a financial system can really bring change is when it gives access to credit for households.

Valerio Filoso and Erasmo Papagni study this with a life-cycle model where there is altruism from parents to offspring and vice-versa. They show that all depends on whether children are an inferior or a normal good, like in poor respectively rich countries. In addition, a relaxation of borrowing constraints allows greater investment in children. There is therefore ambiguity, which is compounded by price and second order effects. To sort it all out, Filoso and Papagni use cross-country data to estimate the sum of all these effects and find indeed that financial development decreases notably fertility in poor economies and increases it in rich ones. This may be an explanation for a fact that puzzled me for some time, why the US has a higher fertility than other rich countries.

Thursday, November 25, 2010

What religion should people adopt if there is uncertainty about the existence of deity? If there were only one choice, to believe or not in a god, the choice would be rather simple as Pascal's wager taught us: believe in the god just in case he turns out to exist. Things become a bit more complex if one has also to choose in which god to potentially believe. First, the fact that they are multiple candidate gods means all but at most one may turn out to be frauds, and choosing the wrong one may have serious adverse consequences. What to believe then? Luckily, economists have you covered.

Tigran Melkonyan and Mark Pingle use decision theory to come to the conclusion that agnosticism, which is to not take a stand, is an optimal choice if any combination of the following hold sufficiently strongly: 1) in-life benefits of agnosticism are higher than "other" religions, 2) the after-life benefits of agnosticism are not too much lower, 3) none of the religions is very likely to be correct, 4) life is not too long or too short, or 5) transition costs from agnosticism to a religion are lower than between religions. These all make intuitive sense, except the fourth, which has to do with the fact that if life is short, you want to believe in a god right away. If life is still expected to be long, you want to believe in no god. Agnosticism is in the middle, where you postpone a choice when you can afford to do so.

It would thus seem that many more people should be agnostic then there are (1-10% in the US). Why so? I would think this has to do with the fact that we do not make such choices from a clean slate: we are conditioned by the environment we grew up in, and kids are easily impressionable. Once they have been told to believe in a particular god, switching to agnosticism is very difficult: you face the disapprobation of the immediate family and peers. But their is also the fact that in any situation, it is very difficult to change the opinion of a person, even if the person is wrong. We are all conditioned that way, and while we easily adopt a first opinion, we rarely change it. This inertia will keep agnosticism, and atheism, a minority in the US for a long time still.

Wednesday, November 24, 2010

Europe and the United States are a story of contrasts these days. While the Obama Administration is pushing for fiscal stimuli at the cost of large deficits, Europe is severely putting the brakes on its public expenses to bring public budget back in order. This is quite ironic, as European governments have in the past used public deficits quite liberally, while the US has always been wary of deficits, and most US states in fact have balanced budget requirements. This makes the proposal that the federal government adopt a balanced budget amendment a hot topic again.

Marina Azzimonti, Marco Battaglini and Stephen Coate use a political economy model to contrast the short time costs of the debt reduction (with lower public services and higher taxes) against the long term benefits of a lower debt burden and the long term cost of higher volatility in tax rates and public services.

In such an analysis, the first order of business is to establish why the Ricardian Equivalence would fail in a quantitatively meaningful way. If it does not, then deficits do not matter as they internalized as future taxes by all agents, and a balanced budget rule has no impact. My reading of the literature is that there certainly no agreement, but overall we are not that far away form the Ricardian Equivalence. Well, let us assume it does not hold, because labor income tax is sufficiently distorting, as Azzimonti, Battaglini and Coate implicitly assume. They also calibrate the model to the US, which is quite tricky as one needs to take a stand on the utility of public goods.

This is where the paper becomes rather strange. At least at the state level, a balanced budget rule is usually thought to be challenging because income and expenses vary with the business cycles. This is not the approach taken here, whereas the fluctuations stem from changes in the taste for public goods. The authors' argument is that one needs to distinguish normal times to unusual times where the government wants to spend massively more, like wars. I do not think this is the real issue. If wars are the problem, then an amendment to the rule can be that properly declared wars can be financed with war bonds.

Well, let us assume this is what we want to care about. The quantitative analysis indicates that a balanced budget rule would indeed be beneficial in the long run, because it imposes lower taxes, and thus less distortions, which are more valuable than the missing public services according to the calibration. But one must point out that there are serious costs in the transition, as one starts with rather high levels of debt. But these transition costs cannot be evaluated with the present model, as it does not feature growth and thus cannot take into account the debt/GDP ratio declines naturally as an economy grows. All in all, I am not sure what we learned with this paper.

Tuesday, November 23, 2010

It is very unfortunate if you die early, and knowing this it would be optimal to compensate you for this misfortune. But this is difficult to achieve as your death is not predictable, and compensation after death is not very helpful to the deceased.

Marc Fleurbaey, Marie-Louise Leroux and Grégory Ponthière have figured out a scheme that would achieve this. First, they need to define a social welfare function that would make it desirable to compensate people for shorter lives. Second, they find a policy that would achieve such a compensation. The policy is to essentially cancel social security while putting the mandatory retirement earlier.

Basically it is all about getting people to consume early, so that the different between being dead or alive is not that large later in life. This seems very difficult to achieve given that life valuation studies indicate that people value life at a multiple of consumption. Furthermore, if we discourage people from saving that much, this must have large negative consequences for the accumulation of capital in a macroeconomic sense, something that has been neglected here, and should not.

Monday, November 22, 2010

There is now a substantial body of literature that advocates for tax rates that would depend on the age of the individual. The logic is simple: the dispersion of wages increases over age, thus the scope for redistribution increases. And if you want to encourage human capital accumulation, you want to tax high incomes more when young than when old. And the uncertainty about outcomes decreases considerably with age. Finally, the source of income varies over time, with capital income taking over labor income at retirement. And, by the way, I previously reported that age-dependent taxation could allow a transition from a pay-as-you-go social security system to a fully funded one.

Spencer Bastani, Sören Blomquist and Luca Micheletto add to this literature in two ways: first they take into account within cohort heterogeneity, second they quantitatively evaluate the welfare gain from a linear age-dependent tax on income. In their overlapping-generation economy, agents face uncertainty about future outcomes and can save. They find that one does not need to tax capital, which is very useful as one does not need to worry about incentive compatibility (it is difficult to lie about one's age) when trying to reach golden rule capital accumulation. Calibrating to Sweden and the United States, they find that a nonlinear age-dependent income tax provides a welfare gain corresponding to about 2-3% respectively 2-2.5% compared to an age-independent one. That is certainly not negligible.

And how the taxes look like? The marginal labor income tax rates are decreasing. That is consistent with this model, as one tries to increase the savings rate to the golden rule level and savings should be encouraged. And the old are systematically paying higher labor income taxes than the young at the same level of income. This is because, I think, capital income taxes are then much lower, and older workers have much more capital income. I wonder how this would look like if human capital accumulation were included as well...

Friday, November 19, 2010

With increased mobility of labor and capital, Europe is currently struggling with tax competition that keeps taxes lower than is deemed healthy, in particular because of some small entities trying to poach on larger ones by attracting the larger tax payers. A response to this problem would be to merge fiscal authorities so as to reduce competition and thus get higher taxes and also allow a fairer distribution of the tax burden across jurisdictions. While this is not (yet) feasible at the European level (there is no talk of a European tax), there is plenty of evidence of within country mergers. What are they expected to bring?

Marie-Laure Breuillé and Skerdilajda Zanaj note that mergers have not only an impact on regional tax rates, but on local ones as well. Mergers are expected to a) reduce tax competition, b) increase tax bases and c) take into account tax externalities of cities. The impact on tax rates differs, however, by level: regional taxes increase, while local ones decrease. That seems like a trivial results, as mergers are suppose to reduce the influence of local jurisdictions. The tax changes are direct consequences of effects a) and b), but c) counteracts it, and an ambiguity may arise. But it turns out from the Nash equilibrium of the game the regions play, c) is always smaller than a) and b). The impact on welfare, though, is difficult to establish before first saying something about public goods and tax distortions. Indeed, some level of tax competition is not always bad.

Thursday, November 18, 2010

The past two decades have seen an impressive wave of privatizations all around the world, especially in utilities and resources. This trend has recently been reversed though, with several large nationalization waves, in particular Latin America. This kind of cycle is not new, as especially the gas industry has gone through several waves each way during the last century. Why all this back and forth?

Roberto Chang, Constantino Hevia and Norman Loayza observe that nationalizations typically happen when the price of the output of reference is high and inequality of wages is also high. The opposite is the case for privatizations. They can explain this with a model of a benevolent government that maximizes a social welfare function represented by the average utility of workers. Under nationalization, all workers are paid the same and exert little effort. Under privatization, firms can discriminate workers, who then put more heart at work, creating wage differentials. When prices for the commodity increase, this generates larger rents for the most productive, and inequality increases.

The story is then of a inequality-efficiency trade-off for the government. In the naturalized state, inequality is low, but so is efficiency. If prices are low, it is more important to increase efficiency, and the firm is privatized. But as it becomes more efficient and discriminates its workers, inequality becomes more important, and the firm is nationalized back. And the cycle continues, with an average of 12 years of privatization and 25 years for nationalization. While this is a very stylized story, after all the model assume an economy with a single sector that has no impact on world prices, it is still a compelling story.

Wednesday, November 17, 2010

During an unemployment spell, people spend significantly more time on leisure and may thus be more interested in social activities like dating. It is simply a matter of available time. But for those who suffer from a reduction in wages during a recession, things are not so clear: the income effect would lead to a reduction in leisure, while the substitution effect would favor an increase. And this interest in dating is not trivial, as 10% of people in the US a registered with an online dating service at any time, while this is 18% in Europe.

Véronique Flambard, Nicolas Vaillant and François-Charles Wolff point out that this ambiguity is even stronger with the demand of dating services, as some would want to find more solace in a partner during hard times, while other feel less secure in dating. The impact of a recession on dating services thus needs to be sorted out empirically. They do this for France with a short monthly times series on economic sentiments, an indicator of dating services (searches for a popular online service on Google) and lagged fertility (as a proxy for those leaving the dating market for good). I am not completely convinced that 56 months of data are sufficient to capture what happens over business cycles (of which there is only one in the data), but let us take this seriously. Using a VECM using four lags (thus we are down to 41 degrees of freedom, they find evidence that dating services demand increases during a downturn. That should hardly surprise us given the impact of the unemployed. Using microeconomic data that distinguishes between the employed and the unemployed would have delivered more interesting results. In fact, using more direct observations of what is to be measured would make results credible.

Tuesday, November 16, 2010

It is well-known that the returns to education are high, higher than financial returns in fact. Especially for primary education, estimation of Mincer equations has yielded returns over 12% a year, returns that decline somewhat with additional years of education. These are personal returns, that is, how much one's wage increases with an additional year of education. This indicates that one should choose more education than less. From a policy point of view, it is, however, not clear that one should try to stretch as much as possible education. Indeed, higher education is more costly and its returns may differ by individual.

Pedro Carneiro, James Heckman and Edward Vytlacil address this heterogeneity by estimating returns from the National Longitudinal Survey of Youth of 1979. They are certainly not the first ones to do so with this dataset, but the innovation is in the use of instrumental variables. Indeed, they identify a serious shortcoming in interpreting the latent (Corr: local) average treatment effect because the people induced to go to school by a change in an instrument may not be the same that are induced to go to school by a given policy change. As a consequence, the returns for the two types of people can be quite different, and they are in this case. They improve the estimation technique by identifying what sections of an economically interpretable mean marginal benefit surface are identified by different instruments.

Carneiro, Heckman and Vytlacil conclude from their analysis that returns of higher education differ indeed from individual to individual, and in a way that is highly predictable by both the econometrician and the individual. In other words, people who sort themselves into higher education are those who have already experienced high returns and are likely to experience high ones in the future. This indicates that with current policies the right people go to higher education, and that encouraging more to go to college would not yield returns as high as for those who already go there.

Monday, November 15, 2010

Many see the Great Recession, as it is now called, as a dual crisis: an economic crisis and a crisis of economics, and more specifically macroeconomics. We have lived over the past twenty years or so through a period of remarkable economic stability, which also got a fancy name, the Great Moderation, and which gave us the illusion that this stability was to last. The fact that substantial recessions are still possible is a rude awakening, in particular because this one is worse than usual. And economists are the prime suspects because first they did not see it coming, and second they did not know how to react to it.

This is a view that is shared by Alessandro Vercelli who, like others, claims that macroeconomics has had a research agenda that was fundamentally flawed because it only studied regular phenomena, and not irregular ones. Indeed, the real business cycle agenda was centered around model economies in general equilibrium at all times, economies designed to replicate salient features of past data.

Hindsight is always 20/20. The research agenda should have focused on including more features about interbank relations, creation of new assets, moral hazard and adverse selection. But one has to understand that it is very difficult to think ahead what could happen and it is easy to criticize after the fact, and especially without offering alternatives. In fact, the DSGE agenda is remarkably well suited to address new situations: it is based on fundamentals, and these micro-foundations allow to study policies and situations not observed in history. This is something the previous agenda largely based on reduced forms could not address without considerable hand-waving (remember the Lucas Critique?). And if you look at the papers written nowadays, macroeconomics seems to have picked up the ball very nicely.

At first, macroeconomists did not have answers ready, or rather they did not have the answers that politicians wanted to hear, namely that something needed to be done. In the face of a crisis, every politician wants to do "something" to show "action". If the economist says that that one should let nature run its course, that one has to bite the bullet and let some banks fail, in particular so as to avoid future moral hazard risk, then the politician will bypass the economist and fall back on the first one that will satisfy him, and he is Keynesian.

Macroeconomics did not suddenly turn Keynesian, politics did. And doing so it compounded the problem and then lead to a crisis of Keynesian nature where nobody trusts anybody and aggregate demand is seriously lacking because nobody in the economy dares to invest due to huge policy uncertainties. Is the central bank still independent from the politicians or not? Seeing Bernanke and Paulson go hand in hand to testify to Congress was the worst possible image of this crisis. What is up with fiscal policy? Are the public deficits going to be taken care of through major tax increases or inflation? The policy prescription seems quite simple: decide once for all, should some courage to impose your policy and be done with it.

Friday, November 12, 2010

In retrospect, the recent swing in house prices in the US a unusually large by international comparison. And it is not just the last swing, if you look at local markets, there have been many episodes before the current one where house prices went through a wild ride up or down. What is so special about the US? Is it irrational exuberance, like Robert Shiller has claimed? Or does this have to do with some characteristics of the US economy?

Nobuhiro Kiyotaki, Alexander Michaelides and Kalin Nikolov design a life-cycle DSGE model of the house market with land and mortgages. There is also capital that is used to build residences on land, as well as commercial real estate. The interest rate is exogenous, which allows to observe what happens when the world interest rate changes. It turns out that real estate prices then fluctuate more if land is a larger share in it value. The same happens with fluctuations in productivity. Why is that so?

The reason is a change in fundamentals leads to large reallocations towards real estate. If land is plentiful, so you want to use it, but this requires large amounts of capital to build all those houses, and in the meanwhile house prices go up. Things are much smoother when land is less important for real estate, like it is in Europe. And interestingly, the downpayment to obtain a mortgage has no impact on this volatility of prices, countering some recent claims.

Thursday, November 11, 2010

I have recently opined on the status of academia, and I am more pessimistic about the survival of the current model in the United States than in Europe, in particular with respect to their research and teaching missions. I find it interesting to see that Bruno Frey seems to share some of this pessimism. But for somewhat different reasons.

Frey longs for the old model where the university is an untouchable and well-funded institution where academics spend their day thinking about research with little regard to what happens around them, While I think some ultra-talented researchers should have such privileges, this does not apply to the very vast majority of current university faculty whose research contributions are very marginal at best. While it important that they carry out research to get their teaching current, research should not be a resource draining focus.

Frey is afraid that his utopia of university is falling apart not because of market forces and costs, because of internal governance. He complains that research is nowadays too specialized. I am afraid this is unavoidable at the frontier, yet in Economics it is probably the least so as many publish in very different fields (and even outside of Economics). I agree with him that there is too much pressure to publish in mid-range universities where teaching should be the focus. He also claims that academia is rife with fraud, something I cannot testify to, but maybe I am naive. He finds also that academia is withering because universities admit too many students (I fully agree) and because people do not need to network within a physical university location to conduct research.

But the main reason for which academia is falling apart is, according to Frey, the emphasis ("mania") on rankings. While I agree that rankings are abused, they have a major justification: holding the university and its members accountable. Every university can (and does) claim it has the best teachers and researchers, but rankings put some realism in this. But what surprises me most in Frey's claim is that he is himself ranking obsessed to the point of venturing in unethical behavior. Indeed, he is managing editor (with his brother) of Kyklos, an old journal that has considerably lost in reputation. To improve its impact factor, he requires that accepted papers cite other articles from Kyklos...

Wednesday, November 10, 2010

It is well known that celebrity endorsement can have a very significant impact on the sale of products, and nowhere is this more true than with the Oprah Winfrey book club. If Oprah endorses a book, not only club members buy it en masse, but also non-members who see the endorsement on television or in the New York Times. But the spill-over does not stop here.

Indeed, Eyal Carmi, Gal Oestreicher-Singer and Arun Sundararajan show that when potential buyers go to Amazon.com to make their purchase of their endorsed book, they are presented with recommendations, which they may also buy, and then get further recommendations. It turns out that these recommendations are followed quite a bit, which generates something like a network contagion effect. The authors find that over several days after the endorsement, such a contagion effect can be significant through five levels. I would have expected this to happen when an academic click through a literature by looking at a paper's references and citations, but I would not have expected this to be so important for laypeople purchasing books, especially within days.

Tuesday, November 9, 2010

One of the critical assumptions in the Malthusian model of growth that the mortality rate depends inversely on the standard of living. While this is not that obvious to replicate with data we have from Malthus' times, such a relationship ship is even more difficult to establish for previous centuries.

Morgan Kelly and Cormac Ó Gráda have dug up some inheritance records from England which allowed them to link wealth and age of death. What they find is quite interesting: all strata of society where affected by agricultural conditions. So if there were some poor crops, rich and poor were more likely to die. This fits right into the Malthusian model where the aggregate standard of living matters. The only subtlety is that the rich die a little later. Indeed, the authors do not attribute this mortality to hunger, but rather vagrancy following some poor crop that spreads epidemics. But such a relationship seems to have disappeared by the 17th century, which the authors justify by government intervention to help the poor. This makes it unclear why Malthus made it such a crucial component of his theory.

Monday, November 8, 2010

The Republican strategy in the US has been since Reagan to starve the government to prevent it from growing. The master at this has been Bush Jr., who to significantly increase expenses while cutting taxes. And the new crop of parliamentarians has vowed to make these tax cuts permanent, thus forcing even further government expense cuts in the near future. While there can be much disagreement about where to cut, one could first ask whether it is a good strategy in the first place to starve the beast like this.

Michael Kumhof, Douglas Laxton and Daniel Leigh use an elaborate model to come to the conclusion that this is a good strategy if government expenses are useless. But if they provide a public good, then it is not. That seems like a very trivial result, and one that can explain the disagreement between the left and the right in the United States. But there is more to the paper. It shows that for this strategy to be welfare enhancing, cuts need to be done very quickly, and cut services must have little impact, and the taxes that are reduced must be very distortionary. It is very unlikely that all three conditions can be satisfied.

Saturday, November 6, 2010

I received a rather unsettling message from Emerald Publishers the other day:

As an Emerald author, you will know that Emerald is dedicated to protecting the copyright of your work. For this reason, we use the Attributor service. Attributor automatically searches cyberlockers for unauthorized copies of works or illegal hosting and then issues legally-binding takedown notices. We are increasing Attributor's searches to the full breadth of the internet, to ensure maximum copyright protection.

For this to run as smoothly and efficiently, we are asking that you provide us with (if applicable):

This is so we can exclude these sites from the Attributor searches, whilst protecting your copyright. Upon provision of this information, we will of course ensure full data protection.

We look forwards to hearing from you.

I find this very disturbing. This message is telling me that this publisher is trying to enforce my copyright while in truth it is the publisher's copyright. And it tells me that I better preemptively alert the publisher where I apply the fair-use provisions of copyright before I get automatically accused of violating copyrights on my own work.

Assigning copyright of your work to Emerald allows us to act on your behalf to:

* promote your rights * facilitate dissemination of your work by granting permissions for educational use or republication * target other Emerald journals whose readership would benefit from access to your work * endeavour to protect your work from any infringement of your rights which are brought to our attention.

It does NOT, in any way, restrict your right or academic freedom to contribute to the wider distribution and readership of your work. This includes the right to:

1. Distribute photocopies of your own version of your article to students and colleagues for teaching/educational purposes within your university or externally. Please note, this does not refer to the Emerald branded, published version. 2. Reproduce your own version of your article, including peer review/editorial changes, in another journal, as content in a book of which you are the author, in a thesis, dissertation or in any other record of study, in print or electronic format as required by your university or for your own career development. 3. Deposit an electronic copy of your own final version of your article, pre- or post-print, on your own or institutional website. The electronic copy cannot be deposited at the stage of acceptance by the Editor.

Note that Emerald may publish your article in another journal, if it thinks it increases its dissemination (or increases the impact factor). Nothing is said about the author agreeing to it. But Emerald is also fine if you try to publish your article elsewhere, although the condition of "for your own career development" is open to interpretation.

That said, all this business with copyright on academic research is really sad. These commercial publishers try to tell us that they do their possible to disseminate research while all they is the exact opposite: they gate the research and chase down ungated versions. Let's all move to open access. Much simpler, much less costly, and much better dissemination!

Friday, November 5, 2010

Many governments are currently struggling to fund the future liabilities stemming from the retirement benefits of their civil servants. For many of those, the fact that they are significantly falling behind, especially as those funds lost value during the crisis, is seen as a very serious problem that could jeopardize those commitments and/or lead to significant tax hikes. But is this really a problem?

Henning Bohn claims that it is not necessarily so. First, most taxpayers are debtors, thus they would prefer not paying taxes now for future pension payments, as they discount at their borrowing rate, which is higher than the return of the pension funds. The violation of the Ricardian Equivalence thus stems from the intermediation costs. This means that governments should actually not fund at all their future pension liabilities. The only exception may be if they need those funds for collateral, which may be quite important in the case of sovereign debt, as I reported recently.

Thursday, November 4, 2010

Periods of crisis generate hardship, in particular if people do not have good ways to insure against these kind of shocks. In theory, temporary losses in income should not have much of a permanent impact, but in practices they may. For example, losing a job entails a wage loss in the next job, because one may have lost human capital, firm specific skills or good outside options. And those wage losses are quite persistent.

Carlos Bozzoli and Climent Quintana-Domeque identify a different persistent effect of a crisis by looking at Argentina. They notice that babies born around 2002 have had a birth weight 30 grams lower than usual, a non-trivial difference that corresponds to a difference between the US and Pakistan. Now, birth weight has been identified to be a remarkably good predictor of future outcomes for a population in terms of health, education and income. Thus, the effects of the 2002 crisis could linger in Argentina for decades.

Wednesday, November 3, 2010

Some people have an idealized image of the centuries before the Industrial Revolution, an image fed by pictures of elegant aristocracy and chivalrous knights. Others are more realist and see these times as a period of utter misery, filth and stagnation. Research on the standard of living in this period does not have conclusive answers because the evidence is sketchy and ranges from complete stagnation and misery à la Malthus to sustained growth. Gregory Clark has recently issued a pair of exciting papers that should set a few records straight, at least for England.

In the first, with Joseph Cummins and Brock Smith, he shows that England was surprisingly rich before the Industrial Revolution. This assertion is based on the fact the a small share of the population was engaged in farming. The primary sector accounted for 52% in 1817, and even 60% in 1560. These measurements are based on the occupations listed in men's wills and indicate that a substantial fraction of people living in rural areas were in fact not engaged in farming. Thus measuring the urban population share can be misleading in this respect.

In the second, Gregory Clark shows that there has been relatively little growth over these centuries, which means that way back in 1381, England was much richer than we thought. At that date, only 55% of the population was engaged in farming, based on records of the Poll Tax. This is very close to the number quoted above for 1817. Thus standards of living were not that different four and a half centuries apart.

Tuesday, November 2, 2010

The United States, so far, is rather unique in that health insurance is typically provided through employers, and not all do. But whether an employer does provide insurance is an important consideration in the job decisions of employees. So this hurts labor mobility and the efficient allocation of labor. But what about entrepreneurship? This cannot be bad, seeing that the US is a global leader in this regard. Not quite.

Robert Fairlie, Kanika Kapur and Susan Gates use the Current Population Survey and find that people that do not benefit from health insurance through a spouse's employer are less likely to start a business. Also, those who are just a little older than 65, when coverage through the government sponsored Medicare program starts, are more likely to start a business than those a little younger than 65. Such an effect is not detectable for any other age.

I find it really strange that those who were most opposed the new health insurance regime were those favoring business interests. They should be happy that employer sponsored health insurance will not stand in the way of entrepreneurship anymore.

Monday, November 1, 2010

Homo œconomicus is greedy, but why? One explanation is that he is envious, and this makes him competitive, leading to the positive outcomes of market economies that we often tout.

Not so fast, says Boris Gershman. Envy can lead to alternative equilibria, some virtuous, some vicious. We are familiar with the virtuous ones, where people "keep up with the Joneses", and thus exert effort towards getting better. Too much effort in fact. But things can also go dramatically the other way, where the best endowed people restrain their efforts to prevent the destructive envy of the poor. This suboptimal effort is likely to occur when there is large inequality and poor property rights.

This last point is important. For example, Russia right after the fall of communism came almost to a standstill because many were envious of successful people in a very negative way. The successful ones later overcame this by hiring their own security forces, a very inefficient use of resources. And this gave the opportunity to organized crime to take hold. Another example can be found in many developing economies where successful members of a family are expected to contribute significantly to the family. This lowers incentives for effort considerably.

There is now a lot of talk of how the increasing inequality in incomes and wealth could have negative consequences. While this paper shows that inequality will get reduced, it comes at the cost of having the most efficient in the society providing less effort than they would be willing to provide otherwise. Gershman suggests this can be avoided by protecting this elite more.